Sept 26, 2018 RE INITIATING REPORT VOL-4, NO-12...

REINITIATION REPORT We had initiated coverage on the Alicon Castalloy Limited on July 25, 2016 (Vol-2 No-12 ) at the price of Rs288 and target of Rs450. Post our coverage, the stock has breached our initial as well as revised target of Rs750 to hit a new high of Rs763. With the recent Annual Report FY18, the conviction in the recommendation stands strong post the analysis. We thereby re-initiate a fresh BUY call on the stock at CMP of Rs704 and target of Rs1,000 over a horizon of 12 months. About the Company: Alicon Castalloy Limited (Alicon) is an established aluminium foundry involved in the manufacturing of very complex aluminium castings for automotive as well as non-automotive customers. These customers are spread across the domestic as well as international boundaries. Alicon is a global company involved in design, engineering, casting, machining, painting and surface treatment of aluminium components. The company amalgamates the best of European engineering, Japanese quality and Indian ingenuity to produce exceptional and innovative aluminium casting products. The company has gradually turned into a single point contact for all engineering solutions related to aluminium alloy castings. Alicon is also one of the biggest foundry infrastructures and is a pioneer in Low Pressure Die Casting (LPDC) and Gravity Die Casting (GDC) providing total aluminium solutions to OEMs under one roof. The company takes advantage of its upgraded technology and state of art plants (two in Pune, one in Haryana (Binola) and one in Europe Slovakia. Thus, the company is aptly placed to offer end-to-end solutions across the entire value chain to diverse industries across the globe. India and Exciting Technologies: Very few large foundries in the Indian foundry industry are modern and competitive; majority of them (informal ones) are using outdated and older technology. If the nation has to grow economically, the major sectors which contribute towards the nation’s IIP and GDP (which have been a laggard over the few years) have to provide a turnaround. Many of these laggards are dependent on the metal cast intermediaries products for sectors such as automobiles, tractors, railways, machine tools, sanitary, pipe fittings, defence, aerospace, earth moving, textile, cement, electrical, power machinery, pumps / valves, wind turbine generators, etc. Looking at these developments as a major opportunity; Alicon appears to be well poised to support its customers in this process of transitioning its products to the revised standards. For e.g., as compared to the conventional cylinder heads (fitted with normal cooling systems), Alicon has developed and supplied cylinder heads with internal oil cooling systems to some of their overseas customers. Such cylinder heads help reduce emissions when compared to the traditional cylinder heads. Since, the company has already worked on technological features which are the need of the hour for Indian auto industry and GOI, Alicon can capitalise on the business opportunity. Along with all the disruptions which will be caused in years and decades to come, e-mobility has emerged as an exciting technological trend. It is estimated by the year 2030, e-mobility would constitute only 30% of the automobiles market (Source: Alicon Castalloy Annual Report 2017-18). A traditional automobile engineering framework generally includes three major building blocks viz., (a) Engine, (b) Transmission and (c) Chassis The use of aluminium castings is concentrated in the Engine. Now, in case of the e-vehicles, the engine and peripherals will be classified into three parts viz. (a) Battery Housing, (b) Motor Housing and (c) Transmission. Only a handful of companies will be able to reap the benefits of this transition.

CMP: Rs.704 TARGET PRICE: Rs.1000 TIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

763 / 513 9,409

Face value: 5

BSE Code NSE CODE

531147 ALICON

Annual Performance

(Rs mn) FY16 FY17 FY18 FY19E

Sales (Net) 7,489 7,728 10,135 12,896

EBITDA 778 868 1,082 1,419

EBITDA (%) 10.4 11.2 10.7 11.0

Other Income 32 37 95 95

Interest 223 265 299 320

Depreciation 267 273 322 376

PBT 320 368 556 817

PAT 222 262 387 538

Equity ( Rs mn) 61 61 67 67

EPS (INR) 20 21 29 40

Ratio Analysis

Parameters (Rs mn) FY16 FY17 FY18 FY19E

EV/EBITDA (x) 14.2 13.3 10.9 8.3

EV/Net Sales (x) 1.5 1.5 1.2 0.9

M Cap/Sales (x) 1.3 1.2 0.9 0.7

M Cap/EBITDA (x) 12.1 10.8 8.7 6.6

Debt/Equity (x) 1.2 1.4 1.0 0.9

ROCE (%) 15.7 15.5 15.7 16.9

Price/Book Value (x) 6.0 4.9 3.7 3.2

P/E (x) 38.8 33.0 24.3 16.4

Share Holding Pattern as on 30th June, 2018

Parameters No of Shares %

Promoters 8,701,413 65.1

Institutions 1,734 0.01

Public 46,62,363 34.9

TOTAL 8,703,147 100.0

Quarterly Performance

Parameters (Rs mn) Sep-17 Dec-17 Mar-18 June-18

Sales (Net) 2,618 2,566 2,977 2,967

EBITDA 247 262 365 325

EBITDA (%) 9 10 12 11

Other Income 36 33 1 28

Interest 71 74 79 79

Depreciation 78 78 92 90

PAT 96 102 128 123

Equity ( Rs mn) 63 67 67 67

Note: All the data is calculated as per Market Price on 25th September 2018

Page No 1

Alicon Castalloy Limited

Sept 26, 2018 RE– INITIATING REPORT VOL-4, NO-12

Please Turn Over

BUY

Source: Annual Report




BUY

Page No 2 Please Turn Over

INVESTMENT RATIONALE:

A) Still Growing Stronger: Innovation is one of the major pillars for the future driven growth strategy of Alicon, which forces the company to continuously strengthen its R&D. The R&D team works closely with its vendors and clients at every stage of product development. In FY2017-18, the company had successfully created a new benchmark in innovation with the development of specialised components for one of Europe’s major electrical vehicles maker. The R&D vision of the Management is to merge innovation, co-creation and sustainable business in light alloy castings with the help of several new technologies like 3D printing, scanning and radiography. The constant innovation done by the company has translated into significant improvement in cost and operational efficiencies for their customers in all the segments and industries which Alicon caters to. The focus of the company will be more on automation, since the clients are requesting for products with minimum touch or handling by human beings. During the year under review, around 64 components were developed where 32 replacement products were introduced. The focus of the company is essentially to make the light weight vehicles inorder to increase the efficiency of the vehicles. The manufacturing facilities which are located in Shikrapur, Chinchwad and Binola in India and Slovakia in Europe are equipped with highly advanced and modern equipments. Some of the high-end machines which are installed in these facilities include CNC-MAKINO, MICRON, HARTFORD, VMC and EDM. During the year under review, the company added a robot for machining line (BR08) which will be aiming at improving productivity and precision. The company is not just focused on technological changes and emerging trends, but also continues to develop products in the traditional business as well. The customers have identified the high end quality products and technical capabilities which have resulted in increased orders for new models and products; for e.g. KTM has increased its sourcing by increasing the order for cylinder heads for more models and new products like Swing Arms. The international business of the company has increased to 18.5% (consolidated revenues) as compared to 14.6% in the previous year which also reiterates the fact of being on track to achieve the target of a third of revenues from International business by FY2020-21.

Exhibit1: Clients- Two Wheelers

Source: Alicon Castalloy Ltd– Company Website

Exhibit2: Clients– Four Wheelers


Exhibit3: Clients– Non Auto Company





BUY

Page No 3 Please Turn Over

INVESTMENT RATIONALE (contd.): B) Alicon – A Futuristic Entity Nearly 64% of the revenues are generated from the segment of 2-wheelers in the auto segment, while 24% from the 4-wheelers and the remaining of around 12% from the non auto segment. In addition to the regular course of business of Alicon, the team is also continuously exploring new product lines to further strengthen the product offerings to its vendors and customers. The e-mobility products are one such offering from the company. Alicon was one of the early identifiers of change in trend and identified the upcoming disruption way ahead of time. The company was already working towards the entire concept of e-vehicles since last 2-3 years. As a result of which the company today is proactively involved with some of the major domestic as well as global OEMs for the development of parts for electric vehicles. Another requirement of e-vehicles is light weight of the vehicles to enhance its efficiency. Many global players have thus looked at development of lighter aluminium parts for the transmission and chassis components part. Alicon seems to be in the process of developing such parts for some of their customers. This will also help the company diversify in these frameworks where they were earlier not present. Some of the opportunities which the company is currently seeing for their European customers include ultra light frame for smart e-scooter, tractor motor housing & Lithium-ion battery housing for electric car and gear housing (front and rear) for electric buses. As and when the e-mobility market starts picking up in Indian in the near future, Alicon will be fully equipped to cater to the demands. The company has already developed Motor Housing, Battery Housing and Gear Box Housing for customers in Europe. Alicon has already commenced supplies for a newly launched smart E-Scooter in India. Moreover, the company has already developed some of the parts for our overseas customers like Motor Housing for Daimler and Bosch and Battery Housing for Samsung. The segment of fast-growing electrical vehicles has immense potential for growth in the coming years. (C) Khed Factory: The Management of the company is seeing immense potential for growth and so they are expanding into newer segments and new product lines to serve the requirements of new customers as well as the existing ones. Following the same strategy, the company aims to achieve a different level of growth trajectory and in order to achieve the same; the company has commenced expansion of production facilities by setting up a green field project at Khed, district of Pune. It is projected that this factory will have state-of-the-art manufacturing facilities with a high level of automation, latest technology, machines which are compliant to industry 4.0 and compliant to India Green Building Concept (IGBC). It is estimated, this facility will be operational by the end of next financial year.

(D) Diverse presence of Alicon group across sectors: The auto segment continues to propel the revenue for the company. In addition to the current offerings, the company has expanded the bouquet of products in the two wheeler segment and developed a series of new suspension parts. In the segment of Defence, Alicon has been able to provide path breaking developments. The industry has now started looking at converting Cast Iron wheels to Aluminium wheels. This change has reduced the weight of a tank by 950 Kg and has also helped in increasing its speed from 40kmph to 75kmph; thus enabling significant cost savings. In general, a tank requires 32 wheels. While Alicon has catered to an order of 994 wheels and would be bidding for an order of roughly 3800 wheels and for other upcoming tenders. Apart from the ones mentioned above, Alicon also caters to various sectors such as agriculture, aero and marine, infrastructure, energy, defence, medical, health etc. In times to come the company will concentrate on niche products in the 16 segments which they have identified.

Exhibit4: Product Mix- Share of Revenue

Source: Alicon Castalloy Ltd– Annual Report2018




BUY

Page No 4

Exhibit5 : Automotive: Cylinder Head


Exhibit6: Automotive: Engine and Transmission Brackets


Exhibit7: Automotive: CAC Tanks


Please Turn Over




BUY

Page No 5

Exhibit8: Automotive: Bridge Fork Top


Exhibit9: Automotive: Intake Manifold


Exhibit10: Automotive: Swing Arm


Exhibit11: Automotive: Other Auto Components




Exhibit12: Non- Automotive: Agriculture Components

Source: Alicon Castalloy Ltd– Company Website Source: Alicon Castalloy Ltd– Company Website



Please Turn Over




BUY

Page No 6

Exhibit14: Non- Automotive: Locomotive Components


Exhibit13: Non- Automotive: Aero and Marine Components

Cylinder Heads Housing Cover Heads

Source: Alicon Castalloy Ltd– Company Website Source: Alicon Castalloy Ltd– Company Website Source: Alicon Castalloy Ltd– Company Website

Exhibit15: Non- Automotive: Infrastructure Components


Exhibit16: Non- Automotive: Energy Components


Exhibit17: Non- Automotive: Defence Components


Please Turn Over




BUY

Page No 7

Financials: During the year under review, on a consolidated level, the company crossed the Rs10,000mn (Rs1000cr) milestone. The company has been constantly following the trend of gradually increasing the dividend payout over the last few years. The exports of the company are gradually inching towards the north. There has been a growth of almost 4% this year with exports at nearly 18.5% as compared to 14.6% in FY17. The company has an ambitious plan to make the exports at nearly 30-33% by FY2021-2022. Needless to say, exports market will add to the top line, where the company has been already exploring opportunities. Alicon has planned a capex of almost Rs4,000mn over the next 3-4 years, where half of it will be funded by debt, while the rest will be funded by internal accruals. The aim of the company is to continuously augment their capabilities to drive the future growth. In the current scenario, with capacity utilisation of nearly 86-88% (where the rest buffer is kept for impromptu orders if any); the focus of the management is to make the maximum utilisation of the available resources at the current plant with maximum innovation, debottlenecking and upgradation. In the current scenario the total capacity is around 36,000MT and nearly 32,000MT is utilised. As mentioned in the earlier notes as well, the company has a plot in Khed district of Pune, and the management is hopeful of commissioning the same by next financial year. This will help the total capacity to be enhanced to nearly 55,000MT by 2021-2022 (these additions will definitely be done gradually over years to come). It is projected the same products will be manufactured there along with higher end products. The company has issued ESOS option of nearly 6.75Lakhs amounting nearly Rs123.2mn which is basically to appreciate the hard work done by the employees; spill over the same may be seen next year as well. In order to get the best innovations and upgradation, management does not hesitate in hiring industry experts from India as well as abroad. This can also lead to an increase in cost of employees. CRISIL has upgraded its ratings on the bank facilities availed by Alicon Castalloy Limited to 'CRISIL A/Stable/CRISIL A1' from 'CRISIL A-/Positive/CRISIL A2+'. This upgrade clearly reflects the expected improvement in the business risk profile in the medium term coupled with healthy revenue growth, steady increase in share of business from existing customers and addition of new customers and products, improving revenue diversity due to growth in non-auto business and exports which ultimately sums to better operating profitability.

Risks and Concerns: Disruption in technology is one of the biggest challenges faced by the company, its competitors and other players in the similar kind of business. However, Alicon was one of the first companies to have identified the shift towards the e-vehicles and started working towards the same nearly 2-3 years before the boom and advent of the same on a larger scale which is seen today. Industrial slowdown or sluggish in the business environment could impact the performance of the company. Fluctuating cost of raw material (Steel &aluminium) and increase in cost of electricity has always been a concern for the company; however the fluctuation in the prices is a pass-through to the customers. Competition from international OEM manufacturers is also a threat to the growth of the company. Moreover, the company is also subjected to fluctuations in the forex market. With the appreciation in USD and the focus of the management towards increasing exports; the company is currently in a sweet spot to reap the benefits of forex gains. The automobile industry contributes around 88% to 90% of total revenues of the company, which clearly shows absolute dependence on the automotive industry. To mitigate the same the company is working to increase the revenue share from the nonautomotive sector. Outlook and Valuations: Alicon has always been a niche company and will continue to be so with the help of innovations and latest technological upgrades. Alicon has always had the endeavour and a vision of being one among the top five global foundries by 2020, off course in terms of innovation. The vision of Alicon is to be a total solution provider to its clients rather than just being a vendor to its customers. The capital infusion and confidence of Enkei Corporation also adds to the bullishness in the company. During the year Enkei Corporation has increased their stake from 8.23% in FY17 to 14.66% this year. The amount raised to the tune of nearly Rs412mn is used for growth capex by Alicon. One of the largest foundries in the world is backing up Alicon, which is a positive sign. Management has been successful in maintaining relations with their suppliers, customers, employees and investors; which has always been the crux of Alicon Castalloy. Management has an ambitious vision to achieving ROCE of around 25% to 27% over the next 4-5 years, which is currently at around 16%. With more or less better monsoons this year, there is a possibility of higher sales of two wheelers in the rural market as well as CV and LCV market which will be an added booster for the company. The conviction provided by the consistent trajectory growth of the company provides us a cushion to maintain our stands and recommend a BUY on the stock with a (third revised target) price of Rs1000 with a 12 month’s perspective.

Exhibit18: Alicon vs. Nifty

Source: Ace Equity

DISCLAIMERS AND DISCLOSURES- Progressive Share Brokers Pvt. Ltd. and its affiliates are a full-service, brokerage and financing group. Progressive Share Brokers Pvt. Ltd. (PSBPL) along with its affiliates are participants in virtually all securities trading markets in India. PSBPL started its operation on the National Stock Exchange (NSE) in 1996. PSBPL is a corporate trading member of Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE) for its stock broking services and is Depository Participant with Central Depository Services Limited (CDSL) and is a member of Association of Mutual Funds of India (AMFI) for distribution of financial products. PSBPL is SEBI registered Research Analyst under SEBI (Research Analysts) Regulations, 2014 with SEBI Registration No. INH000000859. PSBPL hereby declares that it has not defaulted with any stock exchange nor its activities were suspended by any stock exchange with whom it is registered in last five years. PSBPL has not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has its certificate of registration been cancelled by SEBI at any point of time. PSBPL offers research services to clients as well as prospects. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Other disclosures by Progressive Share Brokers Pvt. Ltd. (Research Entity) and its Research Analyst under SEBI (Research Analyst) Regulations, 2014 with reference to the subject company (s) covered in this report-: · PSBPL or its associates financial interest in the subject company: NO · Research Analyst (s) or his/her relative's financial interest in the subject company: NO · PSBPL or its associates and Research Analyst or his/her relative's does not have any material conflict of interest in the subject company. The research Analyst or research entity (PSBPL) has not been engaged in market making activity for the subject company. · PSBPL or its associates actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report: NO · Research Analyst or his/her relatives have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report: NO · PSBPL or its associates may have received any compensation including for brokerage services from the subject company in the past 12 months. PSBPL or its associates may have received compensation for products or services other than brokerage services from the subject company in the past 12 months. PSBPL or its associates have not received any compensation or other benefits from the Subject Company or third party in connection with the research report. Subject Company may have been client of PSBPL or its associates during twelve months preceding the date of distribution of the research report and PSBPL may have co-managed public offering of securities for the subject company in the past twelve months. · The research Analyst has served as officer, director or employee of the subject company: NO PSBPL and/or its affiliates may seek investment banking or other business from the company or companies that are the subject of this material. Our sales people, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses (if any) may make investment decisions that may be inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest including but not limited to those stated herein. Additionally, other important information regarding our relationships with the company or companies that are the subject of this material is provided herein. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution publication, availability or use would be contrary to law or regulation or which would subject PSBPL or its group companies to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored. Unless otherwise stated, this message should not be construed as official confirmation of any transaction. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of PSBPL. All trademarks, service marks and logos used in this report are trademarks or registered trademarks of PSBPL or its Group Companies. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read “Risk Disclosure Document for Capital Market and Derivatives Segments” as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. In so far as this report includes current or historic information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Terms & Conditions: This report has been prepared by PSBPL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of PSBPL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. PSBPL will not treat recipients as customers by virtue of their receiving this report. Compliance Officer:

Mr. Shyam Agrawal, Email Id: [email protected], Contact No.:022-40777500.

Registered Office Address: Progressive Share Brokers Pvt. Ltd, 122-124, Laxmi Plaza, Laxmi Indl Estate, New Link Rd, Andheri West, Mumbai-400053; Tel No.: 022-40777200; www.progressiveshares.com Contact No.:022-40777500.

Sept 26, 2018 RE INITIATING REPORT VOL-4, NO-12...

Documents

Transcript of Sept 26, 2018 RE INITIATING REPORT VOL-4, NO-12...